US personal consumption expenditures (PCE) price index rose by 0.4% month on month in December. This was above the forecast of 0.3%.<\/p>\n
The December reading was 0.1 percentage points higher than expected. The data points to faster monthly price growth than the forecast had indicated.<\/p>\n
This higher-than-expected inflation reading from late last year confirms our view that the Federal Reserve will delay any potential rate cuts. The December PCE data is a clear signal that underlying price pressures remain stubborn. We must now adjust our positions to reflect a more hawkish central bank for at least the first quarter of 2026.<\/p>\n
Following that December data release, we have seen the market aggressively reprice rate expectations. The CME FedWatch tool indicates that probabilities for a rate cut in March have collapsed from over 50% at the year’s start to below 20% as of this week. This shift means short-term interest rate futures are likely to face further downward pressure.<\/p>\n
For equity markets, this implies a period of increased volatility, especially for interest-rate-sensitive growth and tech stocks. We have already observed the VIX inching up from its sub-14 lows in late 2025 to a steadier range around 17. Derivative traders should consider buying protective puts on indices like the Nasdaq 100 or establishing bearish call spreads.<\/p>\n
The inflation signal was reinforced by the surprisingly strong January jobs report, which showed the economy added 225,000 jobs, beating estimates. This labor market strength suggests wage growth will continue to fuel consumption and inflation. The persistence of this trend makes a dovish Fed pivot highly unlikely in the near term.<\/p>\n
This environment is bullish for the U.S. dollar as higher rates attract foreign capital. We expect the Dollar Index (DXY), which has already climbed to a three-month high of 104.50, to test further resistance. Long positions in the dollar against currencies with more dovish central banks, like the Euro or Yen, are advisable.<\/p>\n
We remember this type of stubborn inflation from our experience back in 2023, where the final push to get back to the 2% target was the most difficult. That period taught us not to position for rate cuts prematurely. The market is now coming to terms with that same reality again.<\/p>\n
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